The campaign by the Bush
administration and its Western allies to root out the finances of individuals
and organizations suspected of supporting terrorism, in the aftermath of
the recent terrorist attacks in New York and Washington, is in danger of
disintegrating into a witch hunt against Islamic banks.

A barrage of disinformation, factual
errors and innuendo in articles published by the Western media including
the Daily Mail in London and Le Monde in Paris relating to terrorist funds
especially those linked to Osama Bin Laden, has prompted a number of Gulf
Islamic banks to seek legal advice, with a strong possibility of suing
for libel.

Le Monde on Tuesday went to the extraordinary
length of rewriting an earlier published article, which wrongly included
the names of Gulf banks such as Bahrain International Bank, on a list of
suspected banks reportedly published and circulated by the French regulatory
authorities.

Other wire services have joined the
fray. Bloomberg wire services on Tuesday published a report which stated
that “the (UK) FSA’s publication of the US Treasury’s list of Islamic and
other banks and individuals follows last week’s publication of the US Federal
Bureau of Investigation’s list of individuals allegedly involved in the
terrorist attacks.”

On Tuesday the Financial Times published
a damning feature titled “The Economic Failure of Islam” in which the author,
Martin Wolf, asserted that the failures of the Muslim world are due to
a lack of economic, social and political freedoms, which in any case are
in conflict with ‘Islam’s traditional practice”.

The FSA (Financial Services Authority)
has denied that it has published or circulated such a list, and stressed
that some of the reporting is merely part of the media hype, and acknowledged
that British and other Western financial institutions have long-established
relationships with Islamic and conventional banks from the Middle East
region. Asked whether the FSA was about to publish such as list, a spokesman
replied that he was not aware of such a list and that “the FSA is not in
the business of jumping on any bandwagon.”

The FSA did release on Tuesday a
list published by the US Office of Foreign Assets Controls (OFAC), following
an Order issued on Monday by President George Bush targeting terrorists
and blocking the accounts of a number or organizations and individuals.

Not surprisingly, the names on the
list are those of Osama Bin Laden and his associates, and organizations
either with or suspected to have close links with him and his network.
Not a single bank is included in the list.

The UK authorities have already frozen
one account — a dormant account held at the Barclays Bank branch in London’s
Notting Hill, of an Arab individual suspected with links to Bin Laden.

No one knows the amount of funds
allegedly held by these individuals or organizations, with figures ranging
from $200 million to over $1.5 billion, reflecting the sheer scale of guesswork
involved. Nor do they know how the funds are being laundered or processed.
The Hundi system of remitting workers’ money against chits from the Gulf
to south Asia has been cited. But bankers are doubtful about the scale
of these operations saying that the majority of remittances are still being
transferred through the mainstream banking system.

The FSA’s managing director of Regulatory
Processes and Risk, Carol Sergeant, stressed that “as with the names of
suspected terrorists published recently by the FBI, it is important that
all firms should review any dealings with the individuals and entities
named by OFAC, if they have not already done so.”

A number of banks in London have
confirmed to Arab News that they been holding unscheduled board meetings
to ensure that they review their links with individuals, entities and institutions
from the Muslim countries, and with the FSA directive.

The moves, they stressed, were purely
routine and would not affect their existing client and institutional relationships
with Gulf banks. However, a number of Western banks, following the publication
of the Le Monde article written by Babette Stern, and the naming of several
Islamic banks including Kuwait Finance House, Dubai Islamic Bank, Bahrain
Islamic Bank, Al-Shamal Islamic Bank in Sudan, Tadamon Islamic Bank in
Sudan, and Faisal Islamic Bank of Sudan, allegedly on the list of suspected
banks issued by the French authorities, have confirmed that they are adopting
a softly-softly approach in their relationships with Gulf banks, but not
severing any links.

Banks such as Kuwait Finance House
(KFH) and Dubai Islamic Bank are effectively sovereigns, because governments
hold big stakes in them. Both KFH and DIB are pioneers in the sector, and
have maliciously been named partly because they may have had very small
equity stakes in one or two banks in Sudan.

The irony of course is that KFH,
one of the major Islamic banks, recently signed a ground-breaking agreement
with a major French bank BNP Paribas to launch a $5 billion Islamic leasing
securitization fund. Does this association with KFH qualify BNP Paribas
to be included on the French list of suspected banks?

KFH also earlier this year signed
an agreement with Airbus Industrie, the European aircraft consortium, to
buy four Airbus A320-200s worth $200 million. Once again, does this association
put Airbus Industrie on the suspect list?

While Islamic banks in general report
“business as usual”, there is no doubt that the sector has been affected.
One banker stressed that the deal market is a “dead market” and that the
situation will persist for some months to come.

Yet some Western institutions such
as Towry Law International, part of the giant Australian financial services
group AMP, have given the thumbs up to Islamic finance. This week Towry
Law launched the $20m Mutajarah Fund in Bahrain, which it claims is the
first Shariah-approved multi-manager alternative investment fund employing
various hedge fund managers to trade the fund’s capital. The fund is seen
as an alternative to investment in equities, commodities and currencies.